Oil Set for First Weekly Loss Since October on New Virus Strain

(Bloomberg) -- Oil was poised for its first weekly loss since October as the discovery of a potentially faster-spreading variant of Covid-19 in the U.K. raised the risk of more energy demand-sapping lockdowns.

Futures in New York edged higher Thursday, but are down around 2% this week near $48 a barrel. Tougher restrictions were imposed across a large swath of England in an effort to rein in the mutant strain, which has alarmed scientists and governments around the world because early analysis suggests it may be as much as 70% more transmissible than other circulating strains.

A decline in U.S. crude inventories injected some optimism into the market, helping oil to finish 2.3% higher on Wednesday. Dollar weakness is also boosting the appeal of commodities priced in the currency, while the U.K. and European Union reached the outline of a post-Brexit trade agreement.

Oil is closing out the year on a more somber note after a run of seven weekly gains driven by euphoria over a series of vaccine breakthroughs. The new strain and the realization that anti-virus drugs will take some time to be rolled out have worsened the short-term outlook, while the OPEC+ alliance is poised to add 500,000 barrels a day of production from January.

The weaker dollar, along with the U.S. stockpiles data, is aiding oil prices at the moment, said Victor Shum, a vice president at IHS Markit. “The question is how the market will react when there is more OPEC+ output and the demand isn’t there to support the output increase.”

There’s also a risk that the recent price rally leads to non-OPEC+ production coming back prematurely. Drilling rigs targeting crude oil in the U.S. rose by 1 to 264 last week, the fifth straight increase and the highest level since May 8, according to oilfield services provider Baker Hughes.

Russia’s western ports, meanwhile, will push out more crude than at any time in the past nine months in January, a sign the nation intends to make use of higher OPEC+ production targets that come into force in the new year.

Oil’s futures curve has also weakened. Brent’s prompt timespread is 2 cents a barrel in contango, a bearish market structure where near-term prices are more expensive than later-dated ones. It was as much as 13 cents in backwardation earlier in the month.

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